The recent stock market routs must have caught many small time investors by surprise. The Dow Jones had the worst five day trading performance in history, wiping off trillion of dollars from the market. Both the oil decline and China’s stock market 7 percent drop combined to send Wall Street plunging down the cliff. In the midst of the chaos, many investors must be pondering whether to enter or exit the market.
Most people know that investing is all about emotions – greed and fear. These two emotions often over rule our rational thinking and affect our decision making in investments. To be a successful investor, it certainly take more than knowledge to make money from stocks. You need to take positive action. To take the emotions out of investing, you must set stop-gain or stop-loss level for every stock that you invested in. In doing so, there will be less chances of you looking back in regrets for selling a surging stock too early or live in fear for not selling away your stock investments during market sell-off. You will also have clarity when to enter the market and buy a certain stock.
Truly dividend or long term investors?
I know most investment bloggers and investors will claim that they are dividend or long term investors, so they will just buy and hold their stock portfolio forever, regardless of market conditions. This kind of approach is not wrong but you need to ask yourself whether the opportunity loss is worth it. For example if you invested $100,000 in a counter that pays yearly dividend of 4% but dropped in value by 40% during a market crisis, would you still continue to hold and collect the dividends? Bear in mind that market trend changes all the time, so your stock might not restore back to the level which you buy or desire to sell. The amount of money could have been used to buy other investment products that are not correlated to the stock market movements and can generate higher returns.
How to stop the rot
Perhaps the key reason why most investors do not set stop-gain or stop-loss level is because they do not know how to determine the intrinsic value of the stock. In one of my previous posts, I touched on how to calculate the value of a stock. Once you are aware of the intrinsic value of the stock, you can set the safety buffer level which you want to buy or sell. To prevent yourself from sleep walking to investment losses, you can download the free app, Call Levels.
Stock investments require a lot of discipline and hard work. If you are not prepared to put in the extra effort, then chances are, you are going to lose monies in your investment. Unless you are a professional investor, you are not going to beat the market consistently. So, ensure that you have the framework in place to cut loss and prevent yourself from catching a falling knife.
Investing in stocks is never easy and requires you to analysis the market trend from time to time. After all, business sentiments change all the time. To mitigate the risks involved in stock investments, always make sure that your portfolio is diversified and consists of different asset classes like gold and silver bullion, which tend to move in opposite directions to the stock market. In this way, your losses will be limited during stock market corrections.
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SG Wealth Builder